Mini-budget U-turns ease pressure for big interest rate hikes, experts say

The latest mini-budget U-turns will help ease pressure for aggressive interest rate hikes and reduce government borrowing costs, but more serious measures will be needed to plug the gaping hole in public finances British, experts have warned (John Walton/PA)

The latest mini-budget U-turns will help ease pressure for aggressive interest rate hikes and reduce government borrowing costs, but more serious measures will be needed to plug the gaping hole in public finances. British, experts have warned.

Economists have already started to get their interest rate expectations under control after new Chancellor Jeremy Hunt axed nearly all of his predecessor’s mini-budget plans.

Independent forecasts from the Office for Budget Responsibility (OBR) are always the glaring omission in the latest government announcements and markets will have to wait for the full medium-term statement on October 31 for these.

But the general idea is that the immediate economic calamity may have been narrowly avoided.

The EY Item Club still expects the economy to weaken over the next few quarters, but the risk of a more severe downturn, driven by a continued loss of market confidence, has been reduced

Martin Beck, EY Item Club

It is believed that the Bank of England may not need to react now with such large and rapid rate hikes, which in turn will help mortgage rates to retreat.

Investec’s Philip Shaw said: “Our first thought is that the growth outlook could be weaker, but that could be tempered by the fact that the discount rate potentially doesn’t need to rise as far as our current forecast of 5% early next year.”

All eyes will now be on the Bank’s next rate decision on November 3, when it will also release its latest set of economic forecasts.

However, the Bank will still have the task of containing runaway inflation, which is now expected to rise more than expected next year, given that the energy support program ends in April in its current universal form.

Samuel Tombs of Pantheon Macroeconomics said: “Current wholesale prices suggest energy bills will rise by around 73% in April for households that will not qualify for any additional assistance.

“This would raise the outlook for the headline CPI (consumer price index) inflation rate by 4.8 percentage points for the 12 months from April 2023.”

EY Item Club economic adviser Martin Beck said the new Chancellor’s move to scrap tax cuts could weaken the economy but help avoid an even worse scenario.

He said: “Raising taxes and curbing government spending in an economy facing recession risks weakening the economy.

“Overall, the EY Item Club still expects the economy to shrink over the next few quarters, but the risk of a more severe downturn, driven by a continued loss of market confidence, has been reduced.”

Falling gilt yields and interest rate expectations will also have the welcome effect of helping to reduce borrowing costs for the government.

This will make it slightly easier to put public finances on a sustainable path, but Mr Tombs warned that the Chancellor still has a long way to go.

He estimates that while £31billion in savings have now been found, “the Chancellor still needs to find annual savings of around £40billion, if the OBR is to forecast that the debt-to-domestic product ratio gross will go down in three years”. time”.

Stephen V. Lee